Tom Tennant and his father along with Ed Mead of Viewber fame have started the Somerset Real Estate Investment Trust. They have seeded it with their own property portfolio. It's pretty complex to set one up though.

Nick and I had a meeting with Tom this week with a view to selling our BTL's into the trust as a solution against Section 24.

We are currently doing our due diligence on this as it seems to have a lot of benefits.

I might be in a good position to help you on this. My name is Tom Tennant and I run a company called Somerset Estates REIT Plc. We just became a listed REIT.

The company was originally founded by my Father in 1981 and then at the end of 2017 we listed on the Stock Market and converted to a REIT. There are obvious advantages of being a REIT, not paying any Corporation Tax and being sheltered from Section 24 are the main ones. We decided to convert to a REIT in order to provide landlords a way to mitigate against all the tax and regulation changes going on at the moment. We are able to purchase properties from landlords for shares in our REIT, this way the landlord still receives a property income (REITs must pay out 90% of their rental profits to shareholders) but does not need to pay the extra taxes or worry about the hassle of being a landlord.

Becoming a REIT was very time consuming, it took nearly 2 years, and it cost a fair amount of money! We were able to do so because we already have a profitable property portfolio and we are determined to help landlords still maintain a property income.

This is an interesting idea but how do you deal with the outstanding mortgages?

If you are buying the properties in exchange for share in the REIT then surely they would need to be mortgage free or the current owners have sufficient funds to pay out the mortgages before exchanging for shares?

If that is the case I don't see the benefit as without mortgages S24 makes no difference anyway.

We will speak to the existing bank to see if they are happy for us to take on the debt,

or we will simply replace the debt using our own bank,

or we will use cash funds to pay down the debt.

As you say if there is no mortgage then S24 is irrelevant. However, the advantages of our REIT for landlords goes beyond just S24. With all the extra regulations coming in (Right to Rent checks, Deregulation Act ect) it is becoming harder and harder to be a landlord. By exchanging their properties for shares landlords can get all the benefits of a property income but without the hassle.

I note that REIT's don't pay either corporation or CGT, which is very attractive and also that 90% of rental income must be distributed. However the downside of paying all the income out is it leaves limited scope to expand.

Basically the only methods remaining being debt or issuing further shares. If issuing further shares to acquire property this makes sense, as long as the buy in price is competitive, but what restrictions, if any, are there on further shares being issued? Problem I see is possible dilution of value if shares are issued for capital raising.

The properties are valued by an independent, RICS Surveyor. We then look to save around 2-3% (roughly an estate agents fees) of the value which covers our costs.

Yes, investors can simply put cash in. Indeed we hope that rather than purchasing a buy to let property, investors will buy shares in our REIT instead

The value of the shares in the trust are based on the value of the properties. We will have the properties valued at least annually by a well know firm of Surveyors.

No initial lock in. The shares can be traded on the stock market, which, in theory, is quicker than a traditional property sale.

The REIT is internally managed. This means that the Directors are employed by the REIT and are paid salaries. At the moment our salaries are very low, well below market levels. We have done this to make it clear to investors and landlords that we will only start to make money when the company becomes successful. It does not feel right for us to say to a landlord who swaps their properties for shares that we will be paying ourselves large salaries. Founders shares do not carry any additional benefits, indeed REITs can only have one class of shares.

Yes, there will be an AGM where the Directors can be voted out. (I hope this does not happen!)

We are targetting a gross yield of between 6-8% with some capital value on top as well (I do not like to rely on property price growth to give a return).

I hope this answers your queries but please do let me know if you want some more information.

You are aiming for 6/7% yield. I assume that is gross so you will need to be buying in terraced houses in the north but the management experience is London and SE!

What is the situation if a potential investor's portfolio does not achieve that yield level?

What do you expect the actual net before personal tax return to be? My example - 100k house, 6% yield gross less agent fees, void and maintenance, say £4500.If it was in your fund you wwould have the same costs plus Head Office costs so your net may be 3500pa. Assuming you distribute the minimum 90% profit that would be 3150 net the investor would receive compared with his previous income of 4500. Please correct my figures/assumptions.

I see you are listed on TISE, an offshore body, so who's jurisdiction are under - UK or Guernsey?

Can you tell me the size of the fund, what price it listed at and it's closing on Friday. What volume of shares were traded, say last week?